Is Pakistan's tax system fiscal terrorism?

Unfair taxes burdens while inefficiencies deepen socioeconomic disparity

ISLAMABAD:

Marred by multidimensional extremism and terrorism, Pakistanis must brace for yet another manifestation of hardship: fiscal terrorism. Unfortunately, this time, it can't even be blamed on an external enemy. Its impact is lasting, deep-rooted, and affects the entire socioeconomic spectrum.

A significant portion of Pakistan's tax revenue comes from indirect taxes like GST and excise duties, which are regressive in nature. On paper, someone earning less than Rs50,000 is exempt from income tax, but how much does that person pay in the form of various indirect taxes, sales tax, and levies on petrol, electricity, food, services, phone services, and almost everything? Likely more than 40% of their income. The real impact of this tax burden is ten times higher than the effect of a 40% tax on someone earning Rs5 million per month. This disparity exacerbates poverty and inequality, as the poor are forced to allocate a larger share of their limited income to basic necessities taxed at the same rate as luxury goods.

Moreover, taxes on essential goods and services such as food, fuel, and electricity hit the poor hardest. In 2023, the official inflation rate surged to over 28%, driven by external factors and domestic fiscal mismanagement. The increased cost of living, coupled with heavy indirect taxation, has significantly reduced the real disposable income of lower-income groups. The government's attempts to cushion the poor through targeted subsidies and cash transfers are often insufficient, poorly implemented, or misallocated.

Despite this, the Federal Board of Revenue (FBR) is preparing stricter, more punitive measures against small businesses and ordinary citizens, especially those who are already part of the tax system. The recent "reminders" to existing taxpayers are threatening, to say the least.

Is this an equitable and fair taxation system? Have we obtained the consent of more than 90% of the population, who are subjected to this involuntary and forced taxation? Should we increase the tax burden on sectors enjoying exemptions and write-offs? Should we exempt overseas Pakistanis who are non-resident and have no income in Pakistan from being forced to submit tax returns? Have we revisited the under-taxed sectors such as agriculture? Why don't we increase wealth tax and super tax rates? If the answer to these questions is "no", then this system is nothing short of fiscal terrorism against poor Pakistanis.

Recent measures, such as threats to close mobile connections, ban international travel, and chase down nil tax returns, are laughable at best and fiscal terrorism at worst. Does the FBR realise how many overseas Pakistanis are filing nil returns because they don't have income in Pakistan, and yet they are being pursued? Many were coerced into submitting tax returns in the first place. What does the FBR gain from this? Why create additional administrative burdens with no actual revenue gain—except to keep people terrified?

How does forcing small businesses and shops to pay taxes differ from mafia-like extortion or "Jagga tax"? If these businesses are liable for taxes, why doesn't the FBR follow proper channels, conduct investigations, issue notices, assess liabilities, and then impose taxes? This is akin to "tax-tortion." Today, people feel safer going to a police station than visiting an FBR office.

Why do we have such a large FBR apparatus when more than 90% of revenue comes from indirect taxes or is deducted at source? What if there were no FBR at all? Revenue collection might decrease, but so would some corrupt officials' illicit earnings.

Pakistan's tax system relies heavily on indirect taxes, which are easier to collect but regressive, placing a disproportionate burden on lower-income groups. In contrast, direct taxes, such as income and corporate taxes, contribute a smaller share of total revenue. The formal economy, including large corporations and higher-income individuals, contributes little to the tax base due to widespread tax evasion, weak enforcement, and numerous loopholes. For instance, less than 1% of the population files income tax returns, and many businesses underreport profits to avoid taxation.

Another factor exacerbating inefficiency is the heavy reliance on import duties and consumption-based taxes, such as the General Sales Tax (GST). These taxes are easy to impose but affect consumers indiscriminately, regardless of their income levels. In the fiscal year 2022-23, indirect taxes accounted for approximately 60% of total tax revenue, with the GST, set at 17%, being a major contributor. The GST raises the cost of essential goods and services, disproportionately affecting the poor. This imbalance between indirect and direct taxation creates a system that is not only inefficient but also deeply unfair.

Pakistan's fiscal and tax system is marked by inefficiency, ineffectiveness, and systemic flaws. The over-reliance on indirect taxes, a narrow tax base, penalisation of those already in the system, and widespread tax evasion have led to a regressive tax regime that places a heavy burden on lower-income groups. The systemic inequity in taxation has reached such a level that it amounts to fiscal terrorism—a slow and painful death of socioeconomic optimism. May Allah (SWT) have mercy on us.

THE WRITER IS AN INTERNATIONAL ECONOMIST